Australians have a disturbing mind-set: we prefer foreign experts over our own. People like Steve Keen and Gavin Putland make waves overseas with their valuable commentary on The Great Australian Housing Bubble, but are ignored at home.
So be it. I will pander to your cultural cringe and offer an overseas expert.
Jeremy Grantham is one of the most successful investors and advisors in the world. He has built a global reputation identifying and warning of asset bubbles. Many investors owe their fortune to his timely warnings and are very, very grateful.
Appended to his October 2010 newsletter is this gem. The entire newsletter is available here. You will have to sign up (free) to see it. Over to Mr Grantham:
Postscript: Australian and U.K. Housing
I happily concede that the U.K. and Australian housing events are not your usual bubbles. Australia, though, does pass one bubble test spectacularly: we have always found that pointing out a bubble – particularly a housing bubble – is very upsetting.
After all, almost everyone has a house and, not surprisingly, likes the idea that its recent doubling in value accurately reflects its doubling in service provided, e.g., it keeps the rain out better than it used to, etc. Just kidding.
So, the house is the same. Perhaps the quality of the land has changed? In any case, Australians violently object to the idea that their houses, which have doubled in value in 8 years and quadrupled in 21, are in a bubble.
The U.K. and Australia are different partly because neither had a big increase in house construction. That is to say that the normal capitalist response of supply to higher prices failed. Such failure usually represents some form of government intervention. In Australia, for example, the national government sets the immigration policy, which has encouraged boatloads of immigration, while the local governments refuse to encourage offsetting home construction.
There has also been an unprecedentedly long period of economic boom in Australia, and the terms of trade have moved in its favor. And, let’s not forget the $22,000 subsidy for new buyers. But does anyone think that bubbles occur without a cause? They always need two catalysts: a near-perfect economic situation and accommodating monetary conditions.
The problem is that we live in a mean-reverting world where all of these things eventually change. The key question to ask is: Can a new cohort of young buyers afford to buy starter houses in your city at normal mortgage rates and normal down payment conditions? If not, the game is over and we are just waiting for the ref to blow the whistle. In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable. For example, the average buyer in Sydney has to pay at least 7.5 times income for the average house, and estimates range as high as 9 times. With current mortgage rates at 7.5%, this means that the average buyer would have to chew up 56% of total income (7.5 x 7.5), and the new buyer even more. Good luck to them!
In the U.K., which also has floating rate mortgages and, in this case, artificially low ones, the crunch for new buyers will come when mortgage rates rise to normal. But even now, with desperately low rates, the percentage of new buyers is down. Several of these factors, which do not apply to equities, make for aberrant bubbles, and clearly the Australian and U.K. housing markets fit the bill.
In comparison, the U.S. and Irish housing bubbles behaved themselves. So let’s see what happens and not get too excited. After all, these may be the first of 34 bubbles not to break back to long-term trend. There may be paradigm shifts. Oil looks like one, but oil is a depleting resource. If we could just start depleting Australian land, all might work out well.
David here: Australians! The world is watching our housing bubble and laying bets on when it will burst. Not whether, when. You have been warned!